Here’s Why You Should Use Chart Patterns for Day Trading
Day trading is not easy. Basically, you are trying to predict future price movements, which is not very rational, right? So, intraday traders must use every available tool to maximize their chances of success and not rely on random decisions.
Luckily, there are some techniques that day traders can use to determine where the markets might be headed next. One of these techniques is to use technical analysis chart patterns.
There are many different chart patterns, so we decided to suggest the best day trading reversal patterns. So, let’s dive into why and how you should use chart patterns as part of your intraday trading strategy.
What Are Chart Patterns?
In simple terms, a chart pattern is a shape formed on a price chart that indicates that the price is likely to move in a certain direction. These chart patterns are the basic foundation of the technical analysis methodology and are used by traders as either reversal or continuation trend signals.
A trend reversal pattern indicates that the market has reached a certain level and cannot break it. Therefore, the possibility of the end of the prevailing trend and a trend reversal is likely to occur. On the other hand, a continuation pattern indicates that the price is expected to continue to trade in the same direction.
Due to the repetitive nature of the markets, chart patterns occur frequently and help traders predict price movements, especially for short-term price moves.
Why Do You Need to Use Chart Patterns for Intraday Trading?
As an intraday trader, your primary goal is to find minor price movements. It’s a big challenge, mainly if you are not using any technical tools. But by looking at price charts and finding repetitive price patterns, you can find potential successful trades and increase the chances of success.
Often, a familiar candle pattern can help you understand the market sentiment and be ready for the next price movement. The good thing is that many of these patterns repeat themselves frequently and are relatively easy to spot. From that point on, all you need to do is choose a set of patterns with a high accuracy rate and know where to place your entry order, stop loss and take profit.
This is, among other reasons, why using chart patterns is so valuable and practical for intraday traders. They highlight critical support and resistance areas and help traders identify future price movements.
Best Reversal Chart Patterns to Use in Day Trading
Clearly, some chart patterns are more common and simple to use than others. Some of these patterns formed naturally on price charts on a daily basis or even several times a day.
For example, the Doji candlestick chart pattern is among the most common candlestick reversal patterns you will see on your trading screens. It is usually formed when there is indecision in the markets and the pattern indicates a trend reversal possibility, meaning that the price is likely to move in the opposite direction.
Other than that, there are many other day trading patterns. As we mentioned, chart patterns are categorized as reversal and continuation patterns. So, in this section, we will mention some of the most valuable trend reversal patterns you must know when day trading.
Double and Triple Top and Bottom Patterns
Double and triple top and bottom chart patterns are an essential part of charting analysis as they occur frequently and are usually identified by many traders. Generally, these patterns indicate that prices reached a certain level that buyers or sellers cannot push the price above or below. Thus, as expected, any of these four patterns indicate that the price is likely to reverse, and a new trend might begin.
The good thing is that double and triple top and bottom candlestick patterns are easy to identify and interpret. Once you notice that the price meets a particular support or resistance level two or three times and then bounces back to trade below or above the neckline level, you immediately enter a position with a tight stop loss. It is a great indicator that helps traders find many successful trade opportunities.
Head and Shoulders
The head and shoulders is a popular reversal chart pattern with the same principles as the double and triple top and bottom chart patterns. And it is undoubtedly one of the most reliable chart patterns out there.
Like the triple top pattern, the head and shoulders chart pattern is formed by three peaks that cannot break a particular resistance level. Therefore, as soon as the price breaks below the neckline support level, there are high chances that a bearish trend will start, and the trader will, therefore, enter a short sell position with a stop loss above the neckline support level.
AB=CD Chart Pattern
Although the ABCD chart pattern is not among the most popular and commonly used chart patterns among day traders, it is a very accurate and effective candlestick pattern when used correctly. This harmonic chart pattern is a trend reversal price indicator consisting of 3 consecutive price swings and four legs. It can be used to predict a bullish or a bearish trend based on key Fibonacci retracement levels, depending on the location of the pattern (if it appears during an uptrend or downtrend).
Like many other chart patterns, the ABCD pattern is most effective when combined with other technical analysis tools like Fibonacci support and resistance lines. Ideally, if you learn how to use this pattern and interpret it correctly, you’ll be able to find many trading opportunities with a high winning rate.
The Bottom Line
Stock chart patterns are indeed an integral aspect of analyzing the markets. If you are planning to be an active trader in the stock market, you certainly need to learn how to use these technical indicators.
To start, you first need to get familiar with the most basic and effective chart patterns before moving forward to more complicated (and less common) patterns. After a while, you’ll be able to identify the patterns we introduced above naturally. Then, all that is left to do is to know the implications of each pattern and use it correctly.
This article has been published in accordance with Socialnomics’ disclosure policy.